1 Legal and enforcement framework
1.1 Which legislative and regulatory provisions govern merger control in your jurisdiction?
The merger control regime in China is governed by the Anti-monopoly Law of the People's Republic of China, which came into effect on 1 August 2008 – in particular, Articles 20 to 31 of Chapter 4 on "Concentrations between Undertakings".
Supporting regulations and guidelines include:
- the Provisions of the State Council on the Notification Thresholds for Concentrations between Undertakings;
- the Guidelines of the Anti-monopoly Commission of the State Council on Defining Relevant Markets;
- the Guiding Opinions on Notifications of Concentrations between Undertakings;
- the Measures for Review of Concentrations between Undertakings;
- the Interim Provisions on Standards Applicable to Simple Cases of Concentrations between Undertakings; and
- the Guiding Opinions on Simple Cases of Notifications of Concentration between Undertakings (for Trial Implementation).
1.2 Do any special regimes apply in specific sectors (eg, national security, essential public services)?
Yes. According to the Notice of the General Office of State Council on Establishment of Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, mergers and acquisitions in the following sectors through which a foreign investor assumes control of a domestic target post-merger shall be reviewed under the security review regime:
- military and military supporting enterprises;
- enterprises located around key or sensitive military facilities;
- other enterprises related to national defence and security; and
- enterprises that provide key agricultural products, key energy and resources services, critical infrastructure, important transportation services, key technologies, major equipment manufacturing or similar which relates to national security
1.3 Which body is responsible for enforcing the merger control regime? What powers does it have?
The Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) is responsible for enforcing the merger control regime in China.
No transaction under the merger review regime can be implemented without SAMR clearance. The SAMR may block a transaction which it finds may harm competition or may impose remedies in order to mitigate the anti-competitive effects of the transaction. It also has the power to initiate investigations of transactions that have not been notified to it. If business operators implement a notifiable concentration/transaction without notifying the SAMR and obtaining its approval, or before the expiration of the merger review period, the SAMR may order that:
- implementation of the concentration be halted; and
- the shares or assets be disposed of or the business be transferred by a certain deadline.
The SAMR may also take other measures to restore the pre-transaction status quo and has stepped up its efforts to impose fines on offending parties. Currently, the SAMR may impose a fine of up to RMB 500,000, although it hopes to increase this limit.
2 Definitions and scope of application
2.1 What types of transactions are subject to the merger control regime?
Concentrations between undertakings that trigger the merger filing thresholds are subject to the merger control regime. Under Article 20 of the Anti-monopoly Law, the following types of transactions constitute concentrations between undertakings:
- mergers of undertakings;
- the acquisition of control over other undertakings through a share or asset transfer; and
- the acquisition of control over other undertakings, or the ability to exert a decisive influence on other undertakings, through contracts or the like.
2.2 How is ‘control' defined in the applicable laws and regulations?
Article 20 of the Anti-monopoly Law provides that a concentration involves one business operator obtaining control or otherwise being able to exercise a decisive influence on another business operator. Article 3 of the Guiding Opinions on Notification of Concentrations between Undertakings (the Guiding Opinions) (2018 Revision) further clarifies that ‘control' refers to sole control and joint control.
Article 3 of the Guiding Opinions provides as follows:
Whether the business operators, by means of transactions, have acquired control over other business operators or are capable of exerting a decisive influence on other business operators ("control" and "a decisive influence" are collectively referred as "control" hereinafter) should be determined on the basis of plenty of legal and factual elements. The agreement of concentration and the bylaws of other business operators are important but are not the only sources of reference. The control over other business operators may not be confirmed from the agreement of concentration or the bylaws; however, provided that the business operator is in de facto control of other business operators because of fragmented ownership or other reasons, it will still be considered as having acquired control power in the concentration. The following factors shall be taken into consideration when deciding whether the business operators have the controlling power over other business operators by transactions, including but are not limited to:
- the purpose of the transactions and future plans
- the equity structures and post-transaction equity changes
- the items to vote and the voting mechanism of shareholders' meetings, the business operators' attendance rate and resolutions in the past
- the structure and the voting mechanism of the board of directors and the board of super-visors
- the appointment and dismissal of senior executives
- the relationship between shareholders and directors of the acquired business operator, and whether there are votes by proxy or persons acting in concert, and
- whether there is a significant commercial relationship or a cooperation agreement among the controlling business operators and other business operators.
Some factors stipulated in Article 3 above (eg, (a), (f) and (g)) are less clear, which gives the Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) a high level of discretion to determine the issue of control on a case-by-case basis.
2.3 Is the acquisition of minority interests covered by the merger control regime, and if so, in what circumstances?
Generally, minority shareholdings are unlikely to be deemed as a controlling stake. However, this issue has not been clarified under the current Chinese merger control regime and in some cases the SAMR has reached the opposite conclusion.
For example, as the SAMR has published, in Mitsubishi's proposed acquisition of a stake in Toyo Tire & Rubber (2018), the equity transferred represented 16.95% of the target. In GE Capital's proposed equity transfer to IBK Securities (2016), the equity transferred represented 20% of Hyundai Capital. In the acquisition of stakes in Chongqing Department Store by Wu Mart and Better Life Commercial Chain Share (2016), the equity transferred to the buyers represented 21.32% and 10.91% respectively.
Additionally, in 2015 Fujian Electronics was fined RMB 150,0000 for failure to notify its acquisition of a 35% stake in CHINO-E. This again indicates that the transfer of a minority shareholding might be considered to confer joint control and therefore trigger a SAMR filing obligation.
2.4 Are joint ventures covered by the merger control regime, and if so, in what circumstances?
Yes, joint ventures are caught by the Chinese merger control regime if the turnover thresholds are triggered.
Article 4 of the Guiding Opinions provides that newly established joint ventures constitute a concentration of undertakings if at least two undertakings jointly control the joint venture. By contrast, a newly established joint venture is not considered a concentration of undertakings if only one undertaking controls the joint venture.
2.5 Are foreign-to-foreign transactions covered by the merger control regime, and if so, in what circumstances?
Yes, foreign-to-foreign transactions are covered by the Chinese merger control regime if the turnover thresholds are triggered.
However, a simplified review procedure may apply to certain foreign-to foreign transactions under Article 2 (4)(5) of the Interim Provisions on Standards Applicable to Simple Cases of Concentrations between Undertakings, as follows:
- The undertakings involved in the concentration establish joint ventures outside China and the joint ventures do not engage in business activities in China; or
- The undertakings involved in the concentration acquire shares or assets of overseas companies that do not engage in business activities in China.
Under the simplified procedure, the SAMR generally grants clearance within the 30-day preliminary review period.
2.6 What are the jurisdictional thresholds that trigger the obligation to notify? How are these thresholds calculated?
The Provisions of the State Council on the Notification Thresholds for Concentrations between Undertakings (the Provisions) set out turnover thresholds to determine whether a transaction triggers the merger filing requirement. The turnover thresholds are met where both the combined and individual turnover thresholds set out below are met in respect of a concentration:
- The combined turnover threshold is met where all business operators participating in the concentration have either:
- a combined worldwide turnover of more than RMB 10 billion; or
- a combined turnover in China of more than RMB 2 billion.
- The individual turnover threshold is met where at least two business operators each have a turnover in China of more than RMB 400 million.
The entire group turnover (excluding the turnover from transactions between members of the group) is counted in determining whether pre-merger notification is compulsory. In particular, the turnover of a party involved in the transaction (‘relevant party') includes the turnover of the following undertakings:
- the relevant party itself;
- undertakings that are controlled (directly or indirectly) by the relevant party;
- undertakings that control (directly or indirectly) the relevant party;
- undertakings that are controlled (directly or indirectly) by undertakings that control the relevant party; and
- undertakings that are jointly controlled by two or more parties as specified above.
2.7 Are any types of transactions exempt from the merger control regime?
According to Article 22 of the Anti-monopoly Law, where a concentration between undertakings takes place under any of the following circumstances, it need not be notified to the SAMR:
- One of the undertakings participating in the concentration owns 50% or more of the voting shares or assets of each of the other undertakings; or
- One undertaking, which is not participating in the concentration, owns 50% or more of the voting shares or assets of each of the undertakings participating in the concentration.
3.1 Is notification voluntary or mandatory? If mandatory, are there any exceptions where notification is not required?
Notification is mandatory, except in the cases outlined in question 2.7.
3.2 Is there an opportunity or requirement to discuss a planned transaction with the authority, informally and in confidence, in advance of formal notification?
It is possible to discuss a planned transaction with the Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR), through a process known as pre-notification consultation. However, this is not mandatory.
The consultation may cover the following issues, on which the SAMR may provide the parties with guiding opinions:
- whether the proposed transaction must be notified;
- the documents and information required in the notification;
- specific legal and factual issues, such as market definition and whether the simplified procedure is available;
- guidance on the notification and review procedures; and
- other relevant issues
3.3 Who is responsible for filing the notification?
According to Article 13 of the Guiding Opinions on Notifications of Concentrations between Undertakings, where a concentration is implemented by means of merger, all merging parties are obliged to file the notification. Where a concentration is implemented by other means (ie, share or asset transfer or establishment of a joint venture), the acquirer is responsible for filing the notification and the other parties must cooperate with the notifying party in submitting filing materials. If two or more parties are required to notify a transaction, the parties can agree to appoint one party to submit the filing. However, if the appointed party fails to notify the transaction, the other parties participating in the concentration may make the notification.
3.4 Are there any filing fees, and if so, what are they?
No fee is charged by the SAMR for merger filing and review under China's merger control regime.
3.5 What information must be provided in the notification? What supporting documents must be provided?
According to the Anti-monopoly Law and the Guiding Opinions on Notifications of Concentrations between Undertakings, the following documents and information are required in filing a notification:
- the notification form;
- proof of identity or registration certificate of the notifying parties;
- a description of the impact of the concentration on competition in the relevant markets;
- the concentration agreements;
- the financial and accounting reports of each party to the concentration for the preceding fiscal year, as audited by accounting firms; and
- other documents and materials that may be required by the SAMR.
3.6 Is there a deadline for filing the notification?
There is no specific deadline for filing the notification under the Chinese merger control regime. However, as notifiable transactions cannot be implemented before obtaining clearance from the SAMR, in practice, the notifying party will generally submit the filing to the SAMR immediately after signing the transaction documents, to avoid the risk of a delay to completion.
3.7 Can a transaction be notified prior to signing a definitive agreement?
A party can submit the filing prior to signing a definitive agreement. However, the SAMR may not formally accept the filing until the parties have provided the formal executed transaction documents.
3.8 Are the parties required to delay closing of the transaction until clearance is granted?
Yes – notifiable transactions cannot be implemented before obtaining clearance from the SAMR.
3.9 Will the notification be publicly announced by the authority? If so, how will commercially sensitive information be protected?
The notification will not be publicly announced by the SAMR in full. However, if a transaction is notified under the simplified procedure, the parties will need to submit a public notice form, which states the names and brief introductions of the parties and the transaction. In addition, if the parties have chosen the first and/or second reason for applying for simplified review – that is, their combined market share is less than 15% and/or their market shares are less than 25% in the upstream and downstream markets, for parties with a vertical relationship – definitions of the relevant product markets and geographical markets, as well as the respective market shares of the parties in each, will be needed. In such case the parties are allowed to specify their market shares in ranges.
The notification will be kept strictly confidential by the SAMR. As the SAMR will sometimes need to consult relevant government agencies and/or other stakeholders, to preserve confidentiality, the notifying parties can provide non-confidential versions of the notification with sensitive information redacted.
4 Review process
4.1 What is the review process and what is the timetable for that process?
The Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) envisages a two-stage process for reviewing concentrations:
- a 30-calendar-day ‘preliminary review'; and
- a potential ‘further review' of up to an additional 90 calendar days, which can be further extended by another 60-calendar-day advanced review.
Under the simplified filing and review procedure, the SAMR generally grants merger clearance within the 30-day preliminary review period after formally accepting the filing, if the transaction does not give rise to competition concerns.
Once the parties have submitted the filing, the SAMR may spend around one to two months undertaking an initial review before formally accepting the notification and initiating the substantial review process. During the informal initial review stage, the SAMR will mainly examine whether the format of the filing is correct and whether all required information and documents have been provided. Only once it has found that the filing is satisfactory will the SAMR formally accept the case and start the formal review process.
Set timeframes for the case team and the parties in relation to making and responding to supplemental requests for information are to be introduced by amendments to the Measures for Review of Concentrations between Undertakings. In practice, the SAMR makes information requests within five days of receiving the filing.
4.2 Are there any formal or informal ways of accelerating the timetable for review? Can the authority suspend the timetable for review?
The Chinese merger control regime includes no provisions on accelerating the timetable for review. However, in practice, the filing party may address time-sensitive concerns informally by submitting letters to the SAMR or requesting face-to-face meetings.
Notably, it is crucial to provide the SAMR with complete and accurate information, in order to speed up the merger review process. In addition, timely and effective responses to requests for information and follow-up questions raised by the case handler will be valuable for the review.
The current Chinse merger control regime does not entitle the SAMR to suspend the timetable for review.
4.3 Is there a simplified review process? If so, in what circumstances will it apply?
Yes, the Chinese merger control regime introduced a simplified review process in 2014. One of the following criteria must be met in order to apply for a simplified review:
- The combined market shares of all undertakings involved in the concentration in the same relevant market are less than 15% in total;
- The market shares of the undertakings involved in the concentration, which have a vertical relationship, are less than 25% in the upstream and downstream markets;
- The market shares of the undertakings involved in the concentration, which neither operate in the same relevant market nor have a vertical relationship, are less than 25% in each market related to the transaction;
- The undertakings involved in the concentration establish a joint venture outside China which does not engage in business activities in China;
- The undertakings involved in the concentration acquire shares or assets of overseas companies which do not engage in business activities in China; or
- A joint venture jointly controlled by two or more undertakings will be controlled by one or more undertakings through the concentration.
4.4 To what extent will the authority cooperate with its counterparts in other jurisdictions during the review process?
In reviewing high-profile transactions, the SAMR may cooperate with its counterparts in other jurisdictions. In doing so, the SAMR may request the filing parties to waive confidentiality restrictions, so that it can disclose information obtained from them during the review process with and/or receive information from its counterparts.
4.5 What information-gathering powers does the authority have during the review process?
Prior to formal acceptance, the SAMR may request further information if it finds that the notification documents or materials are incomplete. Once the case has been officially accepted, the SAMR will have broader powers to gather information from the filing parties, competitors, upstream and downstream enterprises, industry associations, experts and relevant government agencies.
If the information provided by the filing party is found to be inaccurate or misleading, the SAMR is entitled to order the filing party to provide correct/accurate information and the parties may face a fine up to RMB 1 million.
4.6 Is there an opportunity for third parties to participate in the review process?
Generally, the SAMR, at its own discretion, may consult with third parties, including competitors, upstream and downstream enterprises, industry associations, experts and relevant government agencies. In practice, stakeholders are allowed to submit opinions, comments and feedback to the SAMR on their own initiative.
Notably, as regards the simplified review, after the case has been officially announced, any third party is entitled to submit comments to the SAMR.
4.7 In cross-border transactions, is a local carve-out possible to avoid delaying closing while the review is ongoing?
No. It is not possible to close a cross-border transaction by carving out local completion prior to clearance by the SAMR.
4.8 What substantive test will the authority apply in reviewing the transaction? Does this test vary depending on sector?
For the purpose of merger assessment, the SAMR will consider whether the transaction would have the effect of eliminating or restricting competition. However, if the filing party can prove that the pro-competitive effects of the transaction would outweigh the anti-competitive effects, or that the transaction is in the public interest, the authority may decide not to block the transaction.
In assessing the competitive effects of a merger, the SAMR shall consider factors including:
- the parties' market shares or power in the relevant market;
- the concentration level in the relevant market;
- the implications of the transaction for market entry or the development of technology;
- the impact on consumers and other business operators; and
- the impact on the national economy.
4.9 Does a different substantive test apply to joint ventures?
No, the same substantive test applies to joint ventures.
4.10 What theories of harm will the authority consider when reviewing the transaction? Will the authority consider any non-competition related issues (eg, labour or social issues)?
In general, the theory of harm considered in the substantive assessment is whether the transaction would give rise to or strengthen a business operator's capacity and motivation to eliminate or restrict competition, and the probability of this happening. With regard to horizontal mergers, the assessment is primarily of unilateral effects and coordinated effects. With regard to non-horizontal mergers – that is, vertical and conglomerate mergers – in addition to coordinated effects, the assessment is primarily on the foreclosure effects, both upstream and downstream.
Non-competition related issues, such as labour and social issues, will not be considered.
5.1 Can the parties negotiate remedies to address any competition concerns identified? If so, what types of remedies may be accepted?
Yes, the parties can negotiate possible remedies with the Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) to address any competition concerns identified. The remedies may be structural, behavioural or a combination of both. To be accepted by the SAMR, the remedies must be sufficient to mitigate the negative effects on competition.
5.2 What are the procedural steps for negotiating and submitting remedies? Can remedies be proposed at any time throughout the review process?
Generally, where the SAMR finds that a transaction may eliminate or restrict competition, the notification will be subject to a Phase II review and the SAMR will raise competition concerns as early as the start of the Phase II review. The parties have the right to propose remedies to the SAMR; the deadline for doing so is 20 days before the expiry of the Phase II review.
The negotiation process normally involves rounds of communications between the filing parties and the SAMR, in which the remedy proposals will be revised. The SAMR can also seek comments from relevant stakeholders to evaluate the effect of the remedy proposals through surveys, hearings, expert meetings and so on.
As the negotiation process can be very time consuming, it is suggested that the parties conduct self-evaluation and prepare remedy proposals at an early stage if the self-evaluation reveals that remedies will likely be required.
5.3 To what extent have remedies been imposed in foreign-to-foreign transactions?
Foreign-to-foreign transactions must be notified if the turnover thresholds are met. The SAMR has the same power to review foreign-to-foreign transactions, and will apply the same standards and tests in reviewing and clearing them, as it does for all other mergers.
6.1 Can the parties appeal the authority's decision? If so, which decisions of the authority can be appealed (eg, all decisions or just the final decision) and what sort of appeal will the reviewing court or tribunal conduct (eg, will it be limited to errors of law or will it conduct a full review of all facts and evidence)?
Under the Chinese merger control regime, court approval of merger control decisions is not required. If a concerned party is dissatisfied with the Anti-monopoly Bureau of the State Administration for Market Regulation's (SAMR) prohibition or conditional approval of a merger, the decision must first be submitted to the SAMR for administrative reconsideration before an administrative suit may be filed before a competent court.
This mechanism applies to all substantive decisions (ie, approvals, conditional approvals and prohibitions).
6.2 Can third parties appeal the authority's decision, and if so, in what circumstances?
Theoretically, a third party whose interests are directly affected by the SAMR's decision may apply for administrative reconsideration before filing an administrative suit before a competent court. In practice, we are unaware of any such cases.
7 Penalties and sanctions
7.1 If notification is mandatory, what sanctions may be imposed for failure to notify? In practice, does the relevant authority frequently impose sanctions for failure to notify?
Failure to notify may incur a fine of up to RMB 500,000. The filing parties may also be ordered to take all necessary measures to unwind the transaction.
In practice, the Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) is issuing an increasing number of penalty decisions for failure to notify and is also seeking to increase the cap on the fine.
7.2 If there is a suspensory obligation, what sanctions may be imposed if the transaction closes while the review is ongoing?
Yes. If the transaction closes while the review is ongoing, the sanctions will be as same as those for failure to notify.
7.3 How is compliance with conditions of approval and sanctions monitored? What sanctions may be imposed for failure to comply?
In general, the SAMR is responsible for the supervision of the implementation of the remedies approved. In addition, in cases where divestments are required, the monitoring trustee approved by the SAMR will undertake this responsibility and report on fulfilment of the remedies to the SAMR.
If the parties fail to comply with the remedies, the SAMR may require corrections by a certain deadline. If the infringement is grievous, the SAMR is entitled to issue an order requiring the parties to:
- cease implementation of the transaction;
- dispose of certain shares or assets by a certain deadline;
- transfer the business by a certain deadline; or
- pay a fine of up to RMB 500,000.
8 Trends and predictions
8.1 How would you describe the current merger control landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In 2018 China's National People's Congress passed legislation to consolidate the previous three antitrust bodies into one. The Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) was officially established on 21 March 2018 and now carries out merger reviews. As a result of the consolidation of these bodies, although the specific information of each case will still be treated strictly confidentially, staff working on different antitrust matters now have greater knowledge at their disposal and more opportunities to exchange experiences with each other.
One notable trend that is emerging is an increase in the number of investigations of transactions which have not been notified for merger review, with penalties imposed in 35 cases by the SAMR and the Ministry of Commerce, the former authority responsible for merger review.
The Anti-monopoly Law is also being amended. The legislative plan of the Standing Committee of the 13th National People's Congress divides legislative projects into three categories:
- First category: draft laws with relatively mature legislative conditions and for consideration during the term of office (69 projects).
- Second category: draft laws that need to be submitted for consideration when legislative conditions are ripe (47 projects).
- Third category: legislative projects for which continued study is required.
The Anti-monopoly Law is listed as a second category project and the term of the Standing Committee is from March 2018 to March 2023.
The SAMR has included the amendment of the Anti-monopoly Law in the 2019 legislative work plan. The Expert Group of the Anti-monopoly Committee of the State Council has also launched relevant research and drafted corresponding research reports. And as recently reported by the Xinhua News Agency, a revised draft of the law has been prepared and will be submitted to relevant departments "in a timely manner".
9 Tips and traps
9.1 What are your top tips for smooth merger clearance and what potential sticking points would you highlight?
The new Anti-monopoly Bureau of the State Administration for Market Regulation (SAMR) combines the functions of merger review and anti-monopoly investigation previously handled by the Ministry of Commerce, the State Administration for Industry and Commerce and the National Development and Reform Commission, respectively. The new competition law enforcement agency thus has more comprehensive powers and more extensive experience. As regards merger review, the integration of personnel has resulted in the integration of law enforcement experience and expertise across various industries. Therefore, as mentioned, the SAMR is taking a more proactive position in antitrust enforcement, with greater confidence.
Parties must thus be better prepared for China merger filings and should ideally consider China factors as early as possible when planning a transaction. To ensure smooth merger clearance, the filing parties should have a solid understanding of the relevant products or services in the Chinese context, as well as Chinese merger review precedents, the competition situation in relevant markets, the potential interests of upstream suppliers or downstream customers and so on.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.